Tag Archives: compensation

A large Milliman client with approximately 30,000 employees operates under a number of distinct brands. The majority of these employees work in the field, spread across the country in numerous regional centers.

The client is committed to a set of core values and a culture of engagement, yet the multiple brands and scattered geography were making it difficult to create a cohesive culture. Despite the organization’s ongoing investment in a solid package of employee programs, services, and opportunities, employees were not understanding and valuing the programs offered—their overall total rewards. In fact, many benefit programs were languishing.

The client approached the firm looking for a solution. The client’s primary goals were to:

• Maximize the return on the considerable investment the organization was making in employee programs and boost awareness of, appreciation for, and participation in key benefit programs.
• Increase employee engagement and, over time, build trust, influence attraction, motivation, and retention efforts, and improve productivity.

The Wage and Hour Division of the U.S. Department of Labor (DOL) has issued a proposed rule that calls for more than a doubling of the annual salary threshold—from the current $23,660 to $50,440 (to be adjusted annually)—for “white-collar” employees to remain exempt from receiving overtime compensation when working more than 40 hours per week. The proposed rule under the Fair Labor Standards Act (FLSA) makes no changes to the “duties” test for employees falling into this category (primarily executive, administrative, professional, computer, and outside sales employees), but seeks comments on this issue.

The proposed rule, which the DOL estimates could entitle more than 4.5 million currently exempt white-collar workers to overtime pay in the first year that the rule is implemented, also would:

• Increase the total annual compensation requirement needed to qualify for the FLSA’s highly compensated employee exemption, from the current $100,000 to $122,148 (with yearly adjustments)
• Establish a mechanism for automatically updating the salary threshold levels using either a fixed percentage of earnings of full-time salaried workers or changes based on the Consumer Price Index
• Permit nondiscretionary bonuses and incentive payments to count toward the salary threshold requirement (but not discretionary bonuses, board or lodging, medical or life insurance payments, retirement plan contributions, or other fringe benefits)

The proposed rule will not take effect until it is issued in final form, which the DOL is expected to do in 2016.

Employers should begin considering how the proposed changes to the salary threshold will affect their compensation practices and the benefits offered to employees. Some retirement plans, for example, take into account only base pay, possibly raising the specter of nondiscrimination testing failures if “includable compensation” excludes overtime and bonus payments when non-highly-compensated participants become newly eligible for overtime (for example, see this blog post). Similarly, an employer that offers different health benefits plans based on workers being classified as “salaried” or “hourly” could experience employees (and their dependents) potentially being covered under a plan that had been limited to staff, according to its FLSA exempt/nonexempt status.

The U.S. Department of Labor (DOL) announced a proposed rule on July 6, 2015, that would change who qualifies for overtime pay.

Today, only 8% of salaried workers qualify for overtime pay—those workers who earn less than $23,660. The proposed rule will extend overtime pay to salaried workers who earn less than about $50,440 next year. The proposed change is estimated to cover 4.6 million workers, more than the current regulations.

What does this mean for the retirement plans of employers that will be affected by this proposed rule?

While many employers use gross compensation or total pay for retirement plan purposes, some employers provide retirement benefits only on base pay, excluding additional pay such as overtime, bonuses, or premiums for shift differentials.

Nondiscrimination testing on compensation is done by comparing the average includable compensation for highly compensated employees (HCEs) to the average includable compensation for non-highly compensated employees (NHCEs). If the HCE average percentage exceeds the NHCE average percentage by more than a de minimis amount, the plan will fail the test. A de minimis amount is generally thought to be no more than 3%, but there is no formal guidance so plan counsel should be involved.

Because the HCE average inclusion percentage exceeds the NHCE average inclusion percentage by no more than 3%, the plan passes the test.

But what happens next year if many of the NHCE participants are suddenly eligible for overtime pay? The increase in excludable overtime pay will cause the NHCE inclusion ratio to drop, and the disparity between HCE and NHCE includable compensation will exceed 3%—and thus fail the test.

Because the HCE average inclusion percentage exceeds the NHCE average inclusion percentage by more than 3%, the plan fails the test.

Failed testing is never good. More complex testing would have to be done, and the plan may have to take corrective action if the complex testing doesn’t pass.

Employers with salaried workers who would qualify for overtime under the proposed changes will want to check their retirement plan compensation definitions and keep an eye on what happens with the proposed overtime regulations.

Interested parties can submit comments on the proposed rule at www.regulations.gov (RIN: 1235-AA11) on or before September 4, 2015. The DOL is expected to make a final rule next year.

According to the Center for American Progress (CAP), it costs nearly $10,000 to replace an employee earning $50,000. For upper management employees, the cost can be 10 to 20 times higher. Then consider the impact of the Patient Protection and Affordable Care Act (ACA) on employee retention. With health coverage available to all and preexisting conditions no longer applicable, employees have more freedom than ever to change jobs. This is why it is so critical to have effective employee retention and attraction strategies in place. One of those strategies is to effectively communicate the value of the benefits you offer via a total rewards statement.

Whether regularly produced in print or hosted online, this statement gives employees a snapshot of their total rewards packages and highlights the value of employer-paid benefits. Without these statements, employees are less likely to be aware of the full value you offer as an employer. This can potentially lead to low morale, dissatisfaction, and, at its worst, departure for an organization that appears to have a better benefits package or that pays an extra $5 per hour. Consider some of the following benefits as well.

• Employee engagement. When you provide information about the investment you’re making in your employee through employer-sponsored benefits, you are also showing employees that you value them. Employees who feel valued are more engaged. And as you’re likely aware, the more engaged an employee is, the more committed he or she is to your organization. Online total rewards statements are particularly effective in driving engagement. They allow you to make regular content updates, such as quarterly commission payments, merit increases, or adding new hires throughout the year. In addition, employees can view archived statements and link directly to benefits providers for more information or to make changes in their benefits.

• Cost reduction. A total rewards statement is an inexpensive way to interact with employees about their benefits. It makes providing information as simple as sending an employee a printed statement or accessing the information at the click of a mouse. Online statements can reduce costs even more because they eliminate printing and mailing costs that are associated with print-only statements.

• Streamlined simplicity. You want your employees to know about the valuable benefits you offer, but expecting employees to proactively seek that information is simply not realistic. The total rewards statement allows you to streamline all this information in one regularly provided document or in one online destination. An effective statement visually demonstrates an employee’s personal total rewards package of compensation plus employer-paid benefits. Your employees may be surprised at how much their benefits add to their personal bottom lines. And that’s a powerful message.

With another open enrollment around the corner, new disclosures required under the ACA, and a competitive job market, your employees are likely paying closer attention to the benefits you offer. Now is the time to beef up your benefit communication efforts and make certain that your employees understand their options and the actual costs.

Following the U.S. Supreme Court’s June 26 ruling that a key provision in the Defense of Marriage Act (DOMA) is unconstitutional, much has been written about the effects of the decision for employer-sponsored benefits and payroll tax administration. Although affected employers will be expected to modify their plans and practices, the federal regulatory agencies to date have not released the necessary guidance for taking such steps as amending plan documents or updating administrative systems to address the application of the Court’s decision. Among the many issues to consider are plan eligibility, spousal benefits, rights of survivors or former spouses to pensions/savings/nonqualified retirement benefits, tax-free health benefits, and COBRA healthcare continuation coverage rights. Furthermore, the guidance will have to address whether required changes will apply prospectively only, or, if applied retroactively, for how far back in time.

The issues raised by the Court’s ruling overturning DOMA at the federal level also are complicated by the fact that same-sex marriages are not recognized in all states. At this time, there are 13 states and the District of Columbia that do so. The remaining states remain free to define marriage as they see fit, and most have banned same-sex marriages.

We anticipate that the federal agencies—including the Departments of Treasury, Labor, and Health and Human Services—will issue specific guidance for employers that sponsor retirement, health and welfare, compensation, and nonqualified plans. When they do so, Milliman will release a Client Action Bulletin or other appropriate communications.

In the meantime, please call your Milliman consultant to discuss the DOMA ruling and the possible effects it may have on your employer-sponsored plans.

With the W-2 reporting requirement to disclose the amount both employee and employer spend on healthcare costs beginning in January 2013, as well as recent fee disclosure requirements for defined contribution plans, benefit cost information for employees is becoming more and more accessible and transparent. Yet, in a time when 40% of employees don’t know the cost of their health insurance (LIMRA, 2011), it begs the question: Are companies doing enough to take advantage of a consistent and deliberate communications strategy?

With customized tools, such as total reward statements, organizations are able to present benefit information beyond the requirements for W-2 reporting, and weave together a sum of all total reward parts—how pay, rewards, and recognition, traditional and nontraditional benefits alike (such as flex time), support each employee. Personalized messages can be targeted to specific groups within a company, such as employee types (field, management, administration, executive), generational types (Gen X, Gen Y, Baby Boomers), or locations, or to employees who don’t participate in the defined contribution plan or the wellness plan. Milliman’s employee communication consultants find that organizations have stronger control over total compensation costs, as well as more flexibility to respond to changes in the market and within the organization itself, after implementation of total compensation strategies.

These strategies increase an employee’s access to more relevant and personalized information. They also act as a potential tool to attract, retain, and motivate employees, which couldn’t be more timely for human resources departments. Recently, attendees and panelists at Milliman’s 2012 Compensation Breakfast in Seattle shared that retention of key employees remains one of their biggest challenges, if not indeed their biggest. A strategy of total compensation will help current employees see the value that not only includes total pay, but also being part of an organization’s mission, goals, values, and culture.